LITCHFIELD — A group of investors plans to open a commercial-scale malting and grain-processing facility about an hour east of Kalamazoo to serve the region’s growing craft beverage industry.

Independent Barley & Malt Inc. is in the process of wrapping up its remaining financing and intends to break ground in April 2019 on what’s billed as the largest malt house east of Milwaukee.

According to CEO Michael Cooper, the company has secured seed capital from its partners, as well as mezzanine financing and debt, to build a commercial-scale malt house that targets production of 47,500 tons of malted grains annually. It aims to commission the plant in the fourth quarter of 2020.

Based in Litchfield, a Hillsdale County city with a population of about 1,300 people, Independent Barley & Malt is the first tenant announced for the new 42-acre Michigan Hub LLC, a $100 million natural gas-fired cogeneration power plant that broke ground last week. The facility, which could produce up to 176 megawatts of electricity by 2022, will supply power, steam and chilled water at advantageous costs to onsite companies.

“The reason we’re at Michigan Hub in Litchfield … is because this offers us the greatest competitive advantage, the lowest cost of doing business. We’re very thermally intensive. If we were combusting natural gas in our kilns, like much of the competition today, this project would not be as profitable or as successful,” said Cooper, an entrepreneur who worked for decades in the biofuels industry.

By locating within the cogen district, Independent Barley & Malt will save 41 percent on its energy bill compared to if the company had to buy energy off the grid, according to Cooper.

“The economies of scale dictate that we have to move large volumes in and out of the plant in order to be able to meet the current price points for bulk malts going into Michigan brewers,” he said.

In addition to the energy cost advantage, Independent Barley & Malt will be able to deliver freight savings to in-state operations that can take bulk malt shipments, thanks to the state’s high gross vehicle weight limit. Any other bulk malt shipments would have to come from out-of-state, where the weight limit generally follows the federal standard, which is about half of the tonnage allowed in Michigan.

Scott Graham, executive director of the Michigan Brewers Guild, describes Independent Barley & Malt’s plans as a “game-changer” for the state’s brewery supply chain. Although a handful of small malt houses have set up shop around the state and worked with farmers to develop the industry, a project of this size brings much needed scale, he said.

“Barley and malting are looking to re-emerge as an industry. There’s been good interest on the part of farmers, good work by the MSU Extension, but there’s an issue if a bunch of farmers grow it and they don’t have a market for it,” Graham said. “If we can see malting barley develop as a viable crop in Michigan, that’s a significant development. (Independent Barley & Malt is) going to require enough barley to make it a more interesting proposition for more farmers.”

OFFERING ADVANTAGES

Independent Barley & Malt will source all of its grain supply from Maumee, Ohio-based The Andersons Inc. (Nasdaq: ANDE), a diversified agribusiness focused on grains, plant nutrients, ethanol and rail.

To start, the maltster plans to source “a majority of the product” from Canada “for economics and quality” reasons, Cooper said. The company will use marine transport to move the grain from Thunder Bay, Ontario to the Port of Toledo, where The Andersons operates a grain terminal. The maltster also has leased space at The Andersons’ grain elevator 15 miles south of the malt house in Reading, Mich. to use for bulk barley storage.

“Not all barleys can make great malts. For world class malt, we need an all of the above (approach),” Cooper said of the company’s sourcing decisions, noting it eventually hopes to find ways to work with farmers in the Great Lakes region. “We also have a plan to implement an agronomy program where we can grow both a winter barley in the southern half of Michigan, Indiana, Ohio, and hopefully a spring barley in the north.”

The Litchfield project also includes plans for a “batch plant” where the company could work directly with brewers of all sizes to develop their own proprietary custom malts, focused on various flavors, colors, brewing properties or the origin of the grain, Cooper said.

“Instead of differentiating with hops or other adjunct additives like fruits or spruce tips, we encourage brewers to differentiate with their own malt,” he said. “All brewers are blending the same 50 varieties of malt from a small amount of global suppliers. … We’re asking folks to come to our plant and work through sensory to bring out and deliver exactly what folks are looking for.”

Cooper declined to comment on ongoing discussions with breweries and distilleries to source malt from his company, but hinted that Independent Barley & Malt had deals in the works.

“You couldn’t complete financing without having a certain amount of commitments,” he said.

Michigan-based brewery owners who spoke on background with MiBiz say they’d consider buying malt from a new source. However, executives at small producers noted that malt pricing is not a major factor in their sourcing decisions since their cost of goods remains minimal, even though they buy at a small scale. Instead, they’d gladly pay more for unique products, such as a quality, all-Michigan malt.

AN INDUSTRY IN FLUX

The undisclosed Independent Barley & Malt investment comes amid an inflection point in the craft beverage industry and its supply chain.

Nationally, craft beer garnered a 12.7-percent volume share of the beer market and accounted for 23.4 percent of retail dollars in 2017, according to the Brewers Association, which only tracks data for small and independent breweries. At midyear, the $26 billion craft beer industry grew by 5 percent, marking a continued plateau in sales growth.

More companies also are fighting for a piece of the industry. The Brewers Association estimates 6,655 breweries were active as of June 30, up nearly 1,100 from the same time a year ago. Another 2,500 to 3,000 remain in the planning stages, according to the trade group.

Additionally, the malt industry supply chain could soon face changes as a major supplier looks to exit its business. Last month, Bloomberg reported that Minnetonka, Minn.-based Cargill Inc. was considering selling off “part or all” of its global malting operation. The report cited sources that put the value of the transaction at more than $1 billion.

Coincidentally, The Andersons — which will supply Independent Barley & Malt — in September appointed former Cargill exec Pat Bowe as its new CEO. Bowe most recently served as the corporate vice president for Cargill’s food ingredients and systems platform.

For his part, Cooper believes Independent Barley & Malt will gain traction among brewers in Michigan and beyond because the company’s products will be able to compete on price and quality.

“I come from the fuel business. (Being) ratable is the ability to deliver on volume, on-spec, every time, all the time. That’s the consistency that the large brewers expect and demand,” Cooper said. “It’s going to take almost two years to build this plant. We’re going to be able to showcase the fact that we’re taking a massive investment risk to build this plant.”